Question

Critically examine the factors influencing exchange rate depreciation     

 

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Answer 1

 

Exchange Rate Depreciation means decrease in the value of the currency of the country.

The factors affecting exchange rate depreciation are as follows :

(i)Decrease in Interest Rates : Decrease in interest rate means lower rate of return which will will attract less number of foreign investors or less foreign capital in the country. So , it will decrease the supply of foriegn currency and exchange rate will rise or depreciates.

(ii) Increase in Inflation : when inflation is higher , currency will loss its value and exchange rate declines. As, nobody wants to invest in the domestic currency.

(iii) Recessionary Phase : Recession means the phase of business cycle in which earnings of the business will declines. This will fall interest rate , and attracts less number of foreign investors.